BRUSSELS – It has now been nearly half a year since the European Central Bank declared its intention to buy some €1.1 trillion ($1.3 trillion) worth of eurozone bonds. When it first announced the so-called “extended asset-purchase program” in January, the ECB emphasized that it was only expanding an existing program, under which it had been buying modest quantities of private-sector bonds, to cover government paper. But this pretense of continuity was just that: a pretense.

In reality, by purchasing large volumes of government bonds, the ECB was crossing the Rubicon; after all, it is explicitly prohibited from financing governments. The ECB’s defense was that that the program was the only way to move inflation closer to its target of approximately 2%. Moreover, it pointed out, it was merely following the example of other major central banks, including the Bank of England, the Bank of Japan, and especially the US Federal Reserve, whose program of quantitative easing (QE) entailed the purchase of more than $2 trillion worth of long-term securities from 2008 to 2012.

Legal uncertainty aside, whether the ECB’s decision to pursue QE can be justified ultimately depends on its impact. But, after six months, that impact remains difficult to assess.

One reason for this is that long-term interest rates are affected not just by the actual bond purchases, but also by financial markets’ expectations about future monetary policy. Indeed, just one day after the ECB made its announcement – and weeks before the purchases began – interest rates fell by a fraction of a percentage point throughout the eurozone.

When the purchases began, rates did continue to fall for a few weeks, so much so that many were concerned that there would not be enough German bonds to meet the ECB’s country-debt quota (determined according to eurozone member states’ GDP and population). But rates have since risen again, and have now returned, in real terms, to pre-QE levels. In this sense, the ECB’s bond-buying program has been a failure.

Other indicators, however, paint a different picture. Notably, price growth turned positive last month, suggesting that the threat of deflation has been eliminated. This has prompted a modest uptick in expected inflation – the ECB’s favorite measure of price stability – not for the immediate future, but in five years, and then for five years.

In concrete terms, the ECB is measuring its policy’s success today according to the expected inflation rate in 2020-2025. This figure, calculated from the prices of different types of indexed and non-indexed five- and ten-year bonds, is based on the somewhat heroic assumption that all of the markets for these bonds work efficiently.

This presents a fundamental contradiction. QE is supposed to work via “portfolio balance effects,” which implies that markets are not fully efficient: purchases of longer-term bonds affect financial conditions by changing the types and quantity of financial assets the public holds. How can one use market prices as an indicator of inflation far into the future and simultaneously justify QE by claiming that most investors stick to certain asset classes and thus do not follow market signals efficiently?

Another problem with using the five-year, five-year-forward rate of expected inflation to gauge QE’s effectiveness is that the rate is correlated with oil prices. Indeed, when oil prices fell last year, so did inflation expectations (measured however imperfectly). And the ECB’s QE announcement coincided with the beginning of the oil-price recovery, which could be expected to increase inflation expectations somewhat.

With such coincidences and contradictions arising in nearly every aspect of the QE debate, it seems that evaluating the policy’s effectiveness is more of an art than a science. Unfortunately, this leaves plenty of room for distortion and bias.

Most glaring is QE supporters’ tendency to ascribe any decline in interest rates before the policy was announced to market participants’ expectations that QE would be coming. Yet they do not apply the same reasoning to the decline in inflation expectations that occurred during the same period. They have followed the same logic since the purchases began, ignoring recent increases in interest rates, while lauding the small rise in inflation expectations as proof of QE’s effectiveness.

In reality, of course, QE – whether the expectation or execution of it – would affect both interest rates, and the inflation expectations that are derived from them. So, if ECB President Mario Draghi wants to highlight the fact that nominal interest rates are lower today than last August, he must also acknowledge that, given low inflation expectations, real interest rates have moved little.

But such pragmatic thinking has been sorely missing from discussions about QE. Instead, each side has caricatured the other: supporters emphasize that QE has nowhere led to runaway inflation, while opponents point out that nowhere has QE alone reignited robust growth.

In fact, there has been neither inflation nor growth: central banks can seemingly pour hundreds of billions of dollars, euros, or yen into the market with little discernible effect. So QE basically consists of an exchange of two low-yielding assets – long-terms bonds and central-bank deposits. In broad and efficient markets, that exchange does not mean much.

How many times have you heard the phrase “bond bubble” in the past three years? It seems that every time you turn on financial television or go to a financial website, there’s an analyst warning you about a bond bubble about to burst. The commentary usually consists of the observation that “interest rates are near an all-time low” and “have nowhere to go but up.”There’s not much more to the analysis than that. In fact, interest rates are near all-time highs and could drop significantly, setting off one of the greatest bond market rallies in history. Allow me to explain…When the typical analyst talks about interest rates, they are looking at the nominal rate, or the rate you actually earn in interest payments when you buy the bond.

When we consider interest rates at we focus on the real interest rate, which is the nominal rate minus inflation. It is true than nominal rates are quite low in historic terms. The coupon on the current 10-year Treasury note is 2.31%, and the yield-to-maturity is only slightly higher at current market prices. But recent inflation reports have shown negative inflation, technically deflation, which puts the real rate at about 3.0%, extremely high by historical standards.

Compare today’s real rate of 3.0% with the real rate in 1980. At that time, long-term bond rates were about 13%, but inflation was out of control at about 15%.

When you subtract 15% from 13%, you get a real rate of negative 2%.

Today’s real rate of 3.0% is five percentage points higher than the real rate in 1980! That’s what we mean when we say real rates are near all-time highs. How low can rates go? We need look no further than Japan and Germany for the answer.

Those countries are advanced developed economies with deep liquid bond markets like the United States. Nominal interest rates in Japan and Germany have been in a range from negative 0.5% to positive 0.5% for months. If U.S. nominal rates fell from 2.3% to 0.3%, similar to Japanese and German rates, that would represent a full two-percentage rate drop in U.S. nominal rates. Since bond prices move inversely to bond yields, a two-percentage point drop in U.S. nominal rates from current levels would be one of the most dramatic bond market rallies in history. We got a taste of this in the Oct. 15, 2014 “flash crash” in bond yields, when bond prices skyrocketed in a matter of minutes. Even if the next rally played out over weeks, rather than minutes, the capital gains on Treasury notes could be huge. What is the catalyst for such a bond market rally? According to the proprietary indications and warnings that I use in my analysis, there are two catalysts on the horizon: recession and a geopolitical shock. It seems extreme to discuss a new recession when it seems we’ve barely had a recovery from the last one. That’s because the recovery has been so weak. But this recovery is now 72 months old, which is much longer than the average recovery since the end of World War II, and long even by the standard of the stronger recoveries since 1982. But just because the recovery is long doesn’t mean it can’t get longer. Still, the data are flashing recession warning signs. Job creation peaked last November. Retail sales have disappointed four of the last five months. GDP will probably be negative in the first quarter of 2015, when the revisions are announced later this month. And the Atlanta Fed real-time GDP tracker (shown below) for the second quarter shows that growth is barely positive and trending downward.

These kinds of weak and declining growth and borderline recessionary conditions are completely inconsistent with real interest rates of 3.0%. In fact, that sky-high real rate is one of the reasons growth is so weak. Since the Fed cannot stimulate by cutting rates that are already at zero, the bond market will have to do the Fed’s job for it. Then there is the possibility of a geopolitical shock that would send global investors running into the U.S. Treasury market in a flight to safety. After the failure of President Obama to observe his own “red line” in Syria in 2012, dictators in Russia and China perceived the U.S. as weak and decided to test the United States in other areas.Russia invaded Crimea in 2014 and has supported a separatist movement in eastern Ukraine ever since. China has expanded its territorial claims in the South China Sea and has been backing up those claims by building artificial islands and installing oil rigs. Ukraine and the South China Sea are like geopolitical bookends in the Eurasian landmass.Confrontation will test U.S. military alliances with NATO and the Philippines. Whether a war breaks out remains to be seen, but tensions are increasing and the likelihood of some direct military confrontation is high. Given the current high level of U.S. real interest rates, either a recession or a geopolitical flare-up would be enough to trigger a bond market rally. The possibility of both happening in the next six months cannot be ruled out.

Editor’s Note: Jim Rickards has published a third book entitled “The Big Drop: How to Grow Your Wealth During the Coming Collapse.” It’s available exclusively for readers of his monthly investment letter called Strategic Intelligence. Before you read today’s essay, please click here to see why it’s the resource every investor should have if they’re concerned about the future of the dollar.]

China is in the late stages of constructing its thirteenth five-year plan, a process that commenced over a year ago and will result in a first draft in October. While the bulk of the plan will concern regional and domestic development, it is the international aspects that will concern the rest of the world. The plan, which will produce specific goals for 2016-20, is already having an effect on China's foreign and trade policy.At its centre will be a shift of emphasis away from trade with the advanced nations, whose prospects are bound to subside towards their level of economic growth. Instead, to maintain the long-term objective of 7% growth in GDP China will turn her attention to improving Asia's infrastructure, a policy for which the building-blocks are now in place. The Silk Road Project is advancing from the drawing board, and the Chinese-led Asian Infrastructure Investment Bank (AIIB), which will arrange finance for projects totalling as much as $20 trillion over the next thirty years, was formally established this year.Working in partnership with China through the Shanghai Cooperation Organisation (SCO) will be Russia, whose resources are central to Asia's modernisation. The SCO will eventually cover a territory from the Bering Strait to the Persian Gulf. To obtain extra resources, China has already established a dominant presence on the ground in Sub-Saharan Africa, secured the undivided attention of the Middle East by being its largest customer, and through its own diaspora can count on the cooperation of the South-East Asian nations currently in the West's sphere of influence. At the end of the thirteenth plan a substantial majority of the world's population will have become involved one way another.The implications for the West are becoming apparent. We have already seen how Europe and Japan have clamoured to join the AIIB, despite their alliances with America. Unfortunately, America has been a Goliath to China's David: her mistake has been not to recognise the passing of her own era and embrace a future based on Asia.Instead the US has sought to be obstructive. China now knows that America will always be fundamentally uncooperative and that she must plan accordingly. This is why, with Russia's support, she is ditching the dollar. She has been discouraged by America's attitude into establishing a parallel financial and monetary system. In doing so, she needs to offer something better than the US dollar as a currency medium, because for her Pan-Asian development plans she will need to attract long-term funds from Western capital markets.This is where the new BRICS bank comes in. Its priority will be to de-risk Asian currencies which are less credible in international markets than the dollar, yen, euro or sterling (the constituents of the IMF's SDR). The obvious way to do this would be to incorporate something all Asians understand as money, and that is gold, which could be why most SCO member countries have been adding to their reserves. This would solve all cross-border currency issues within the SCO. While the West may not be initially impressed by such a development, a move by the BRICS bank to include gold in its own version of the SDR will in time highlight the relative weaknesses of a dollar-reserve system, particularly when Asia dumps its dollar reserves in favour of a BRICS super-currency.This could mark the end of the era of pure fiat currencies, which started with the Nixon shock in 1971 when the Bretton Woods agreement died. Competition from gold-backed currencies from Asia would be the most serious threat yet faced by American hegemony.

The European Union has warned Greece in the clearest language to date that its patience is exhausted and the country will be abandoned to its fate unless it accepts creditor demands in short order.

Donald Tusk, the EU’s president, said the radical-Left Syriza government must stop spinning out the negotiations and face hard choices before Greece spirals irrevocably into default.

"There is no more time for gambling. The day is coming, I'm afraid, that someone says that the game is over," he said.

The blunt language came as the International Monetary Fund pulled its officials out of the talks, citing a failure to break the deadlock after four months of wrangling. “There are major differences between us in most key areas. There has been no progress in narrowing these differences,” it said.

Greek prime minister Alexis Tsipras failed to secure any substantive concessions during two days of stormy talks with key power-brokers in Brussels, including German Chancellor Angela Merkel and French president Francois Hollande.

Mrs Merkel tried to put the best gloss on events, insisting that Greece had agreed to work “full steam ahead” to break the impasse. Yet her assurances belie the reality that Syriza and Europe’s creditor powers are no closer to a deal as bankruptcy looms. The Greek interior ministry has ordered regional governors and mayors to transfer all cash reserves to the central bank as an emergency measure. The mounting worry is that the government may not be able to meet its bill for salaries and pensions this month. The economy is sliding deeper into recession and tax revenues are falling short. Bizarrely, the Athens stock market soared 8.2pc in a wave of euphoria, swept by unsubstantiated rumours of a breakthrough that left Greek officials scratching their heads. The Piraeus Bank and Eurobank both jumped 19pc, while yields on two-year Greek debt plummeted 135 basis points to 23.8pc. Markets may have misjudged the political choreography of the talks in Brussels. It is understood that Mr Tsipras chose to acquiesce in what insiders deem to be a "negotiating charade" in order to show willingness and avoid blame at home if the showdown ends in rupture, and even in Greece’s ejection from the euro. It does not mean that Athens has ditched its fundamental demand for debt restructuring, an end to austerity and a comprehensive solution that puts Greece on a viable economic path. “They tell us that there will be plenty of money for the next year or two if we sign on the dotted line and accept the Memorandum,” said one official. “The creditors are taking this to the wire because they think we are scared – and we are scared – but we cannot accept these terms because they solve nothing,” he said. Syriza has proposed a debt swap that would let it borrow from the eurozone bail-out find (ESM) to repay €27bn of liabilities to the European Central Bank, a rotation from one creditor to another. This would have the effect of stretching maturities and averting a default to the ECB in July. The plan has so far been rejected out of hand by Brussels. Jens Weidmann, chief of Germany’s Bundesbank, warned that time is running out as Greek depositors withdraw an estimated €2bn a week from local banks. “The risk of insolvency is increasing by the day,” he said. Greek officials are afraid that the bank withdrawals could snowball out of control at any time, forcing the finance ministry to take drastic action. The ECB has increased its emergency lifeline for Greek banks to €83bn to offset the deposit flight, becoming ever more exposed itself should Greece default. Mr Weidmann said contagion risks have diminished but “should not be underestimated”. Greece has already become the first developed country in history to skip a payment to the IMF, invoking a procedure not used since the 1980s to bundle €1.6bn of payments at the end of the month. The crisis is closing in on several fronts at once. The jobless rate has begun to climb again, jumping to 26.6pc in the first quarter. Communist trade unions held a sit-in at the finance ministry to protest cuts on Thursday, holding banners reading: "We have bled enough, we have paid enough". Others protested outside the presidential palace. Syriza has reached a potentially dangerous political juncture where it may start to lose core public consent. The latest polls show that growing numbers are losing faith in Mr Tsipras’s negotiating tactics, with 53.4pc saying they are dissatisfied. Yet the creditors themselves are deeply split. Over the past 10 days Mrs Merkel has sidelined her irascible finance minister, Wolfgang Schauble, cutting him out of all key negotiations on Greece. “He can give interviews but he can’t take part in the talks,” said a senior figure from the Social Democrats (SPD). Die Welt reports that Mrs Merkel is now working hand-in-glove with her coalition partner and the SPD leader, Sigmar Gabriel, who has long argued that it would be a geostrategic disaster and a shattering moral defeat for Europe if Greece were forced out of the euro. Mr Schauble is the proponent of a “velvet divorce” for Greece: an orderly exit from the euro and a return to the drachma, with the ECB playing a crucial role in stabilizing the new currency. Germany and other creditors would then step in with a "Marshall Plan" to put the country back on its feet within the EU. What Mr Schauble is not prepared to accept is a breach of contract by Greece on the terms of its previous "Troika" rescue, which he fears would lead to moral hazard and the collapse of fiscal discipline across Southern Europe. He is backed by much of the ruling Christian Democrat party (CDU) and its Bavarian allies (CSU) Mrs Merkel appears to have concluded that “Grexit” is fraught with risk and would inevitably be blamed on Germany, leaving a toxic political and emotional legacy. She has repeatedly stated that Greece must be kept in monetary union at all costs. Syriza insiders view her – paradoxically – as their greatest ally in the EMU power structure. What nobody knows is whether even Mrs Merkel is powerful enough to defy hardliners in her own party and a chorus of voices in EMU capitals demanding that Greek feet are held to the fire - until they burn.

If you remember the dot com bubble as clearly as I do and are a technical analyst then you will recall the month which the NASDAQ broke down and confirmed a new bear market has started. The date was November of 2000.

You may be wondering why I bring this up. What do tech stocks have to do with commodities?

Good question because they have nothing in common. But the key here is that when a bull market ends in one asset class that money is shifted into another. That money moved into commodities and resource stocks and in a big way.

Precious metals and miners exploded, surging an average of 1000% return (10 times ROI) over the next six years, topping out in 2008. In fact, these resource stocks bottom the exact month which the NASDAQ confirmed it was in a bear market on Nov 2000.

Compare Dot-Com Bubble & Burst to Precious Metals Stocks

Over the next couple of weeks, I will be sharing some of my top stock picks in the metals sector (gold, silver, nickel, and copper). If you missed the 2001 and 2008 metals bull market then you best pay attention and be sure you don’t miss what is about to happen.

Compare Bull Market in Stocks with the Energy Sector

The financial markets and asset classes move in cycles, and there are times when specific sectors outperform others. Resources stocks specifically the energy sector is about to enter its strongest phase within the US equities bull market which started in early 2009.

Oil stocks have a lot of positive things in their favor in my opinion, though many will disagree. But it’s all in how you look at the data and your investment horizon.

During the previous market tops which are the same for NASDAQ, DOW, S&P 500, energy stocks have outperformed most sectors. Why? In short, we will always need energy, many of the companies pay dividends and when money starts to roll out of equities the underlying commodities typically hold their value for an extended period of time.

These past stock market tops generated 36%-40% returns during a time when most traders and investors were losing their shirts, or should I say lost 50% of their life savings… Which train would you rather be on?

Now take a quick look at the price of crude oil

Oil has formed what is called a (double bottom, or “W” formation and also appears to be completing a cup & handle pattern). Whatever you want to call it, they are all very bullish patterns, meaning a much higher price for oil is expected.

An Oil Junior Resource Stock

There are times during market cycles when I like to own shares of some junior companies. When a major shift looks imminent within a market or sector just like we saw in 2000 and again in 2008 I like to hold shares in companies which have the potential to rally several hundred percent.

A couple of weeks ago I talked about a speculative oil stock Cardiff Energy Corp. which I own shares. The story behind this stock is real and the horizontal well which they will start drilling mid-June 2015 has the potential to generate 5-7 times of a vertical well. Below is the chart with my short term targets.

The low priced crude oil is wreaking havoc with oil companies and share prices. The best plays are those who have the lowest cost of production per barrel and I heard this well could produce profits even if oil was trading at $25 per barrel and sold at WTI pricing with no discount.

The energy behind this share price is very impressive and shows that investors are confident in the horizontal well. If they strike oil who knows where the share price could rally to.

Side note: I met with Jack Bal the President, CFO, and Direction of Cardiff Energy Corp. in Toronto recently to learn more about the company and projects. Cardiff is currently doing a private placement to raise capital and if I’m correct investors can get shares at 25% discount from the current market value. And from what I understand they have room for a few more small investors. If this is of interested to you give Jack Bal a call directly at Cardiff Energy 1-604-306-5285, and you can mention this report if you want.

Next Bull Market Conclusion:

In short, every good investment will eventually become a bad one and vice versa. Knowing when to shift our capital from one sector to another is vital for steady long-term growth of our portfolio.

Over the next couple weeks through this multi-part series I will be sharing some very lucrative stock picks which I am investing in and the second one will likely be a nickel resource company that looks poised to rocket higher.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.